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It’s a common question. “I have this foreign bank account, but I haven’t been declaring it by filing Form TD F 90-22.1.? [PDF] What should I do?”

The short answer is clean it up. All of it.

First things first. Form TD F 90-22.1 is commonly known as an FBAR, for Foreign Bank Account Report.

The Treasury Department [warning: video] is announcing that it is ready to pounce. You’d be a damned fool to delay cleaning up your wreckage.

The next question is “But what about the penalties?”

Yep, the penalties are massive. And for extra spice and excitement, they can throw you in jail, too.

Up to now my experience has been that people who voluntarily file the required forms–even if they are years late–haven’t had penalties imposed.

Tax Notes Today (Lexis cite is 2008 TNT 219-3) has another report from last weekend’s California Tax Bar and California Tax Policy Conference session in San Francisco. Luis Tejeda, an IRS fraud technical supervisor, spoke and confirmed what many of us have suspected. The article says:

FBAR filings have surged to nearly 400,000 a year, Tejeda said, in part because of increased voluntary compliance with publicity about the government’s interest in the UBS and Lichtenstein cases. “We want taxpayers to come forward voluntarily, first of all,” he said. In most cases, IRS review in Detroit of filed FBARs does not lead to further investigation by compliance employees, he said.“What we’re really concentrating on is those that do not come forward,” Tejeda said. An increasing number of taxpayers are coming forward with information as a result of the IRS’s efforts at “turning the tide around” in international enforcement, he said, because U.S. taxpayers realize the IRS can get that information from many more sources now. [Emphasis added].

No guarantees. But coming forward and cleaning things up is the best indicated strategy and gives you the best chance at no penalties or at least reduced penalties. It’s either that or live with stress. Or, I guess, you can run away to Panama.

Life’s too short. (That is secret code for “You are going to die someday so don’t be dumb. It’s just money.”)